Uncertainties Linger Despite European Summit Agreements

That was the 200 points down I was expecting in my blog for Tuesday, I was beginning to think it wouldn’t come, in fact Wednesday’s blog started – “Wrong call, or maybe I am a day too early.”

What’s my point ?

That a drop of 200 – 300 Dow points was “normal,” especially after a 7-day, 9% rally in expectation that the Europeans would be somewhere in the same book, not to mention on the same page !

We’ll see if common sense, human nature (not wanting to throw oneself over a cliff), doesn’t bring the Europeans close enough in coming days to hammer out a framework for addressing debt and sovereign debt issues in coming days.

Some of yesterday’s selling was a reaction to news coming out of the ECB, but some was profit taking by traders who, waiting to “sell into good news, saw the market stall, and got spooked.

TODAY: The global investment community is presently crunching numbers and dissecting potential uncertainties of decisions arising from this week’s summit of eurozone members. So far, so good. I think the key to “up” or “down” lies in how many of the pre- summit uncertainties have been eliminated ?

Look for a positive open, then volatility until this afternoon when we will get our answer.

From what I know at this writing, it looks like it was a productive summit, but the follow through is critical. Some profit taking is possible after the big move up since November 25. We do have a chance to extend that run, if not today, then next week.

It looks like the Europeans have produced a framework for solving its two-year old bank and sovereign debt crisis with agreements to tighten anti-deficit budget rules and add 200 billion euros to the International Monetary Fund’s [IMF] war chest.

It is a “very good outcome,” ECB president Mario Draghi says, explaining that the summit outlined a “fiscal compact” to prevent future surges in government debt, as well as accelerate the creation of a 500 billion euro rescue fund and reduce investors’ exposure the cost of future bailouts.*

The objective here is to create a permanent rescue fund called the European Stability Mechanism [ESM] by mid-2012

Negatives include: It will take months to implement decisions arrived at this week’s summit. Unfortunately that spells continued UNCERTAINTY which keeps a certain number of investors on the sidelines. Then too, Eurozone governments must repay more than 1.1 trillion euros of long-and shortterm debt next year. What’s more, European banks have close to 665 billion of debt coming due within six months, and according to Holger Schmeiding, chief European economist at London’s Berenberg Bank, such an avalanche of refinancing needs in the next two months means the crisis could worsen forcing a response by the ECB to scramble to save the euro and itself.*

Then of course, there are the credit rating agencies which has put Germany, France and 13 eurozone countries on review for downgrade. Lower ratings could spell higher borrowing rates !

EUROPEAN UNION/EUROZONE

The European Union [EU] is an economic and political union of 27 sovereign member states with origins going back to 1958, but which was officially established by the Maastricht Treaty in 1993. Its goals are a free movement of goods, services, capital and people differing in life style, language, economies, geography, religion, politics and history.

Important components of the EU include: European Parliament, European Commission, Council of European Union, European Council Court of Justice and European Union, and the European Central Bank.

The euro area [eurozone] is an economic and monetary union [EMU] of 17 member nations that use the “euro” as their common currency and sole legal tender. Its members include: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain.

While the goal of single currency originated with the European Economic Community [EEC] in 1969, it was not until 1993 that members were legally bound to start the monetary union no later than January 1, 1999. At that point, the euro was launched after which it was an “accounting” currency until January 1, 2002 when euro notes and coins were issued and national currencies phased out in the eurozone.

The European Central Bank [ECB] is the central bank for the eurozone. Governed by its president, Mario Draghi, and a board of the heads of national central banks, the ECB’s primary responsibility is to maintain the euro’s purchasing power and price stability within the eurozone.

The Eurosystem is the monetary authority of the eurozone comprised of the ECB and the central banks of its member states, which are charged with applying the ECB’s policy.

The European Commission, comprised of one commissioner from each of the 27 member states, represents the interests of the EU, drafts proposals for laws, and manages the day-to-day business and disbursement of funds.

European Banking Authority [EBA]: Established on Jan. 1, 2011 as a regularity agency to conduct stress tests of banks in order to detect weaknesses in capital structure. It has the power to overrule national regulators if necessary to prevent unfair competitive advantages between jurisdictions. It issues a report, Common Reporting Framework [COREP]covering capital requirements regarding credit risk, market risk, operational risk, fund and capital adequacy ratios.

The European Financial Stability Facility [EFSF]: created by eurozone members to safeguard financial stability in Europe. Authority includes loans to countries in need, intervention in primary and secondary markets pursuant to ECB analysis, finance recapitalizations of financial institutions. It is backed by guarantee from the eurozone members for a total of 780 billion euros and has a lending capacity of 440 billion euros. (not considered adequate)

The writer of Brooksie’s Daily Stock Market blog, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

DISCLOSURE:
The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer